"Check carefully whose money you take" recommends an old principle of the much-quoted merchant's ethics. Today the formula is somewhat shorter: KYC (know your customer). The list of associated obligations for it is longer.
In order to make money laundering, criminal activities, white-collar crime, terrorism and war financing more difficult, numerous regulations have been introduced in the recent decades that require companies in the financial sector to obtain precise information about the business model of new customers and about the origin of the related financial flows. The aim is to prevent, for example, the movement of unclean money via fake companies. The measures associated with this are collectively referred to as "Anti-Money Laundering" (AML).
Who has to check whom?
It’s not only the financial institutions that are obliged to check the integrity of their business partners. According to §2 Abs 1 GwG, insurance brokers, notaries, lawyers, tax consultants, auditors, real estate agents and casinos located in Germany must also establish the identities of their customers, keep an eye on their payment flows and, if necessary, take action, e.g., if money laundering is suspected. In this case, it must be checked, among other things, whether the names of the clients appear on various negative lists.
On the one hand, companies are required to identify so-called "Politically Exposed Persons" (PEPs). These are not explicitly criminals, but merely persons who, compared to ordinary citizens, would theoretically have more opportunities to appropriate assets illegally, e.g., through embezzlement or bribery. If a new client is a PEP, additional money laundering checks are therefore necessary as a preventive measure. If this does not give rise to any suspicious activity, nothing stands in the way of a business relationship.
Furthermore, various sanction lists must be checked, in which persons and companies are listed and business with them should definitely not be conducted.
One challenge here is that numerous such lists exist in parallel: Although the AML laws in Europe are based on the same guidelines, their implementation in the individual member countries sometimes differs greatly. Depending on the business activity, it is also advisable not to ignore the lists from the UK, Switzerland and the USA.
Additional expenditure since the Ukraine war
With the Ukraine war, the KYC/AML effort has increased, in some cases by leaps and bounds. Since the beginning of the Russian invasion, the EU's direct sanctions lists have been expanded by more than 5,000 people from Russia and Belarus alone. In addition, there are further lists that follow on from these, comprising around 20,000 names (since the publication date the list has been updated and is now comprised of c.a. 30 000 names). The group of so-called PEPs has also grown considerably. And this is only the status today. The lists are updated daily, new names are added, others are deleted.
An additional difficulty is that the original names of the sanctioned persons are written in the Cyrillic alphabet and there are often several transcriptions in Latin letters that differ from each other.
Efficiency through automated solution
Due to the enormous increase in auditing work, more and more companies are currently asking themselves: How can we ensure complete compliance while keeping the additional workload as low as possible? In most cases, specialized software is the only sensible solution. The good news is that even for small and medium-sized companies, there are now automated services and packages that are both very efficient and affordable.
However, there are a few things to look out for when choosing the right automated KYC/AML solution: First of all, it is important to evaluate how comprehensive a software solution actually needs to be, depending on one's own business risks. Furthermore, the solution should be able to be seamlessly integrated into one's own workflows and easily connected to the customer management system. Smooth exchange between compliance, front office and other departments should also be ensured.
Other useful functionalities include interfaces between systems and automatic import, automatic name screening, update functions for all relevant lists, flexibly adjustable "risk appetite" and support in securing one's own data quality in advance.
Which solution is exactly right for one's own requirements ultimately depends on many factors. Reliable and competent providers can be recognized, among other things, by the fact that free initial consultations and product demonstrations are offered. The necessity of digitalizing compliance measures is (unfortunately) more urgent than ever before, also due to the global political situation.
View the original article: Warum eine automatisierte Lösung bei KYC sinnvoll ist | Börsen-Zeitung (boersen-zeitung.de)